Social Security tipping over into the red

posted at 1:28 pm on February 4, 2010 by Ed Morrissey

Last month, we noted that Social Security had delivered its worst performance in decades. Now, Allen Sloan warns investors at Yahoo Finance that the entire program has gone into the red — and will stay there. Get ready, Sloan says, for the mother of all bailouts:

Don’t look now. But even as the bank bailout is winding down, another huge bailout is starting, this time for the Social Security system.

A report from the Congressional Budget Office shows that for the first time in 25 years, Social Security is taking in less in taxes than it is spending on benefits.

Instead of helping to finance the rest of the government, as it has done for decades, our nation’s biggest social program needs help from the Treasury to keep benefit checks from bouncing — in other words, a taxpayer bailout.

The only event that might keep this from being the very next bailout would be a faster-than-expected collapse at FHA, which has followed the Fannie Mae/Freddie Mac strategy of buying marginal paper and securitizing it through MBSs. Otherwise, we’re already beginning to bail out SSA, thanks to a generation-long bailout of the federal government by the SSA in the other direction.

Technically, the fund should receive $120 billion in interest payments from the Treasury, which owes SSA for decades of skim repaid only in IOUs. However, the interest itself will only be paid in IOUs. Sloan explains the problem:

The first number is $120 billion, the interest that Social Security will earn on its trust fund in fiscal 2010 (see page 74 of the CBO report). The second is $92 billion, the overall Social Security surplus for fiscal 2010 (see page 116).

This means that without the interest income, Social Security will be $28 billion in the hole this fiscal year, which ends Sept. 30.

Why disregard the interest? Because as people like me have said repeatedly over the years, the interest, which consists of Treasury IOUs that the Social Security trust fund gets on its holdings of government securities, doesn’t provide Social Security with any cash that it can use to pay its bills. The interest is merely an accounting entry with no economic significance.

Just to make clear, that $92 billion surplus includes the nonexistent interest payments from Treasury. The fund will go into the red for $28 billion, meaning that we will have our first cash-negative year ever in SSA. It won’t be the last, either.

The crisis in SocSec was supposed to arrive in 2019, according to the CBO in 2008. Who came up with that figure? Peter Orszag, the same man who missed the 10-year deficit projection by over $2.2 trillion in the spring of 2009, and who now runs the Office of Management and Budget. Democrats used that figure, as well as others produced by various sources in the years preceding that analysis, to argue against Social Security reform, and to paint Republicans who warned that the crisis was a lot closer as Chicken Littles or grubby politicians who just wanted to get their hands on Grandma’s Social Security check.

Between this fiscal year and FY2019, instead of a cumulative Social Security primary deficit of $100 billion, we’ll have a cumulative Social Security primary deficit of $157 billion. That is, of course, we actually do get all the economic and tax growth that the CBO seems to hope we will. If we don’t, the chart I put together back in September showing just how easy it was to turn the CBO’s hope into red ink as far as the eye can see will be rosy.

That also doesn’t include Obama’s plan for a second round of $250 checks to every Social Security recipient. That is a drag of another $13 billion on this year, which would make this year’s cash deficit somewhere around $51 billion.

This means that the federal government not only can’t rely on SocSec surpluses, which have been used to paper over budget deficits, it will have to increase the federal deficit to make benefit payments from now on. George Bush and the GOP saw this coming, while Democrats like Orszag insisted that we had nothing to worry about. Even if we had a federal government living within its means, this would be a crisis — but with the debt that Obama is accumulating, it’s a fiscal tsunami waiting to crest.

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–And if we had “invested” Social Security funds in the stock market as was proposed under Bush’s plan, things would probably have been significantly worse than they now are.

Jimbo3 on February 4, 2010 at 2:03 PM

Impossible to know, but likely not correct. Markets are cyclical, and yes, the decline of the last year or so may have occured anyway, but with SS amounts going into the market instead of the govt black hole?

Market would’ve declined less. Would’ve recovered quicker. Economy would be much stronger with that money circulating as capital for businesses to use rather than being wasted by the govt. Defecits would be lower as businesses and individuals are paying in more taxes because they’re making more money. Etc.

OK, maybe I finally got it. The Trust will have $92 billion left at the end of the year, after having earned $120 billion in interest. So what was the balance in the Trust at the beginning of the year? Higher or lower than $92 billion?

Because when you get down to it, this gist of this entire thread is not government bailing out social security, but government bailing out government. Social security is government. Pension obligations are government.

You are missing something. The interest “earned” is monopoly money — it’s an IOU from Treasury. That is, it’s the left hand promising the right hand money. Remove the $120 bn from $92 bn and the imaginary “surplus” vanishes, replaced by a deficit.

When SocSec loans $120B to the general fund, what you basically have is the government loaning money to itself. So where does the general fund get the extra money for interest to pay back SocSec? Taxes.

So what is the difference if the money comes from income taxes or payroll taxes? There is none.

Think in your head if wife loaned her husband extra money and demanded interest in the repayment. Where does this “interest” come from when you view the couple as one entity? Did the couple come into new money because the wife charged her husband interest?

Why do I now have this feeling, that this destruction by the Dems has been going on long before Obama took his throne. I also have a feeling it’s now going to be a race. Between Obama, annointing himself King for life, or the November elections.

If this destruction of our economy, and growing debt continue, we’re not going to survive to November, are we?

It is getting tough to stay opptimistic. Reading those Harrisburg, PA bankruptcy stories on Drudge this morning did not help. My state if IL is bad bad shape. Who is going to move to my state to create demand for houses ten years from now?

I wish I could remember the names of the various liberals that I debated back in 2005 who told me over and over again that SocSec was basically sound, and only small tweaks would be needed to keep it in the black forever.

OK, maybe I finally got it. The Trust will have $92 billion left at the end of the year, after having earned $120 billion in interest. So what was the balance in the Trust at the beginning of the year? Higher or lower than $92 billion?

taznar on February 4, 2010 at 2:15 PM

Social Security is owed huge sums by the federal government. They have been running a surplus for the last 25 years. The budget deficits for the last 25 years were understated because of the surplus which will theoretically need to be paid back now that SS is in the red. I doubt they can pay it back though.

Somewhere, sometime, some politician is going to (inevitably) sacrific his or her career and make sweeping Social Security reform, resulting in drastic, drastic cuts to beneficiaries. It won’t be pretty, but it will be necessary.

Later in the year I hope to talk with you more fully about these plans. A few timid people, who fear progress, will try to give you new and strange names for what we are doing. Sometimes they will call it “Fascism”, sometimes “Communism”, sometimes “Regimentation”, sometimes “Socialism”. But, in so doing, they are trying to make very complex and theoretical something that is really very simple and very practical.

–And if we had “invested” Social Security funds in the stock market as was proposed under Bush’s plan, things would probably have been significantly worse than they now are.

Jimbo3 on February 4, 2010 at 2:03 PM

Perhaps you are correct in that regard, but there is one major difference. The type of investments Bush was advocating were close to no risk CDs which probably would have lost the value in the short term, but when you are planning for your retirement you don’t think like that. Everything would have been regained when a recovery began.

With Social Security the way it is now we will never be in the black again. Why people think the government can spend my money better than I can I will never know.

OK, I’m no financial wizard, so maybe I’m not understanding the terms here. The trust fund will earn $120 billion. Why is that being subtracted from the surplus instead of added?

Obviously I’m missing something.

taznar on February 4, 2010 at 2:10 PM

The reason we are having the deficits even though there is a profit is because the government takes the profits from Social Security and spends it on other bills. Here is a video that explains it better than I can.

If we would have saved every penny since Social Security began and put it in an interest bearing “lockbox” we most likely wouldn’t even have a problem. The problem is that both sides of the aisle like spending money and its the peons like us that get squeezed.

If you have time I HIGHLY suggest the documentary IOUSA. It came out a few years ago and things have only gotten worse. If you are in need of a good buzzkill this movie will give it to you. It is funny though that the Democrats in the movie are railing against the Bush deficits.

Even with the recent problems, investing in the stock market would have left you more money than SS is going to be able to pay out.

MarkTheGreat on February 4, 2010 at 2:36 PM

I agree. My own portfolio is evidence of such a claim.

But the stock market is not for all. Not much gets me angry on these threads, but that issue does. No one would have been forced into the stock market. I would guess if Bush created a bill, there would have been a wealth\income threshold before you could start putting money into the market (not making a statement that I support this limitation).

The steps could have been less dramatic, 10 years ago, but the Democrats convinced their f’ing (Rahm)ed voters to not worry, be happy.

Tomorrow is now.

MNHawk on February 4, 2010 at 2:15 PM

Back in the 1980’s, when the last of the SS tax increases went into affect, some friends and I were writting every congresscritter we could get an address for, urging them to start raising the SS retirement age by 1 month per year.

If such a plan had been started then, SS would still be solidly in the black, even with the current bad economy.

Some Republicans were interested, the Democrats, to a man told us not to worry because SS had just been rescued and it would never need another fix.

–And if we had “invested” Social Security funds in the stock market as was proposed under Bush’s plan, things would probably have been significantly worse than they now are.

Jimbo3 on February 4, 2010 at 2:03 PM

That was always the risk which is why the proposal was to put just a portion of SS into the market, not the whole thing.

BTW I just got my 401k statement in the mail and to my utter amazement, as bad as 2008 and 2009 were from an investment perspective, my 1 year (2009) rate of return was 27%!! It was the best investment year I’ve had in ages!

If we would have saved every penny since Social Security began and put it in an interest bearing “lockbox” we most likely wouldn’t even have a problem. The problem is that both sides of the aisle like spending money and its the peons like us that get squeezed.
…
txaggie on February 4, 2010 at 2:39 PM

The lockbox idea wouldn’t have made any difference because the interest would still be owed by the government. They would have had to report much higher budget deficits and that might have helped limit spending some, but there wouldn’t actually have been any more money to spend.

I think some here are missing a very large point. Social Security surpluses have been financing a significant portion of the Fed expansion for the last 25 years. They were a “stealth” tax that we were promised was being “put away” and guaranteed by the US government for our retirement. Now that there are no surpluses, the money to finance anything new, or just a continuation of current spending levels for the Fed has to come from new taxes, and those taxes will be significant. I suspect a VAT will be making an appearance soon.

Good luck with that. As of right now, every tax we pay, would have to be upped by 50%, just to keep up with spending. Nevermind the economy crashing if that happens. Nevermind that next year, tax rates would have to go up again, as fewer yet working people are supporting more yet retired people.

The bubble is popping. The first little pop was a couple of years ago, when that California city declared bankruptcy, to get away from pension obligations.

I think some here are missing a very large point. Social Security surpluses have been financing a significant portion of the Fed expansion for the last 25 years. They were a “stealth” tax that we were promised was being “put away” and guaranteed by the US government for our retirement. Now that there are no surpluses, the money to finance anything new, or just a continuation of current spending levels for the Fed has to come from new taxes, and those taxes will be significant. I suspect a VAT will be making an appearance soon.

Johnnyreb on February 4, 2010 at 2:51 PM

Yep. The money I paid into SS for myself and employees all those years got whisked away, never to be seen again. Now, the butcher’s bill comes due.

BTW She’s in a “secret hearing” today in Boston trying to get “asylum”. She still lives on the dole, getting welfare, food stamps, free health insurance and lives (like Obama) in public housing, on Flaherty Way in Southie if anyone is interested in standing outside her door to protest.

And Michael Graham says she donated donated $260 to Barry’s campaign for president – which is also against the law because she’s not a U.S. citizen. Didn’t Obama make a stink about foreigners money influencing U.S. elections in his SOTU</strike> Blame Bush speech?

Stop with this stock market crap. Being in the stock market would not be required of anyone. An option for a low interest CD type of account would have been available to anyone.

Anyways, like investing in government Treasuries is a good idea like the SocSec funds are currently?

WashJeff on February 4, 2010 at 2:05 PM

—Here’s the way it was described:

How would individual accounts work? The accounts would be modeled on the Thrift Savings Plan — a 401-k type program that is already available to government employees — and centrally administered by the government.

Workers would have a choice of five broadly diversified index funds and a lifecycle fund, in which the portfolio grows more conservative as the investor nears retirement.

“We will make sure there are good options to protect your investments from sudden market swings on the eve of your retirement,” the president said in his speech.
Specifically, when a worker turns 47 the account will automatically be invested in the lifecycle fund unless the worker and his or her spouse sign a waiver opting out.

In terms of fees, the Social Security Administration estimates the administrative cost per account will be 0.3 percentage points.

Money in the accounts could not be taken out or borrowed before retirement. At retirement, it’s likely workers would have to annuitize a portion and only take out a lump sum if doing so would not result in the worker moving below the poverty line. Any unused portion of the account could be left to heirs.

Gee, I’m sure glad I was forced to pay into this boondoggle for the last 35 years and haven’t touched a dime of it and won’t be able to for another 7 years at the very least, should it (or I) even be around then. And there have been several articles lately blaming old people for causing this mess when they’re the ones who paid for it all these years. How is it their fault that the government screwed it up beyond repair? How is it their fault the government couldn’t come up with a way to avoid this problem in the almost 50 years it’s been in existence? I know, they’ll blame Bush, but he tried to warn them about this, repeatedly.

For the little old lady who told that the only reason I vote Republican was that I hadn’t lived through the Great Depression: The gravy train’s comin’ to an end, grandma! Tell me how my Republican azz tastes when you pull the lever for an R because your SS check bounced.

The gravy train’s comin’ to an end, grandma! Tell me how my Republican azz tastes when you pull the lever for an R because your SS check bounced.

Kafir on February 4, 2010 at 3:16 PM

How in the world do you call this a gravy train? People like me have paid into the system for almost 35 years now, not by choice, mind you, but as a required tax. That’s no government handout, to say it is is ridiculous and insulting.

That was a description of a plan that was never ever put into the form of a bill…too much resistence. Do you not think that choice would have been offered to assuage the concerns of people like you that might fear the market even at a young age?

My 401(k) has life cycle funds. I can choose to act like I am near retirement and choose the conservative one if I want to. It figures SocSec reform would have provided choice.

If I was was executive and legislature of this country, and I could not get rid of the income tax, I would implement a deduction up to 20K of savings per year. This would replace IRA, 401k, 529, etc. Encourage people to save. Regarding SocSec, I would create a 50 year phase out program. Anyone under 30 would NOT get socsec and have lower taxes. Anyone could voluntarily opt out in return for lower taxes (no benefits).

Has Anybody heard about the Far-left National Socialist Democrats wanting to seize people’s 401k’s to prop up Soc Sec?

Chainsaw56 on February 4, 2010 at 3:09 PM

–It was a request by the Treasury for suggestions on how to make distributions from 401(k) plans and employer plans more secure, such as by using annuities instead of lump sum payments. But all company pension plans already have a joint and survivior annuity as the default option, so it really doesn’t apply to most employer plans.

How in the world do you call this a gravy train? People like me have paid into the system for almost 35 years now, not by choice, mind you, but as a required tax. That’s no government handout, to say it is is ridiculous and insulting.

scalleywag on February 4, 2010 at 3:22 PM

It’s not insulting, it’s reality. You (as in your generation) did not pay into the system, what you’re now going to take out. Just as your parents did not pay, what they took out.

It’s called a pyramid scheme. It’s used to buy the votes of the gullible, at the expense of their grandchildren. It worked.

That was a description of a plan that was never ever put into the form of a bill…too much resistence. Do you not think that choice would have been offered to assuage the concerns of people like you that might fear the market even at a young age?

My 401(k) has life cycle funds. I can choose to act like I am near retirement and choose the conservative one if I want to. It figures SocSec reform would have provided choice.

If I was was executive and legislature of this country, and I could not get rid of the income tax, I would implement a deduction up to 20K of savings per year. This would replace IRA, 401k, 529, etc. Encourage people to save. Regarding SocSec, I would create a 50 year phase out program. Anyone under 30 would NOT get socsec and have lower taxes. Anyone could voluntarily opt out in return for lower taxes (no benefits).

WashJeff on February 4, 2010 at 3:32 PM

–The original idea of the plan was that investments in the stock market, over a long period of time, tend to return about 1-2% more per year than investments. So it was going to be part of the way to close the Social Security funding gap. I’m not sure they would have allowed people under some age to have moved their money away from stock market-based indexes, but we’ll never know.

Blamers and calling SS some kind of entitlement program or a handout is especially insulting when you’ve paid for it all these years. I never complained about paying all this money to go towards someone elses retirement income and health care, some of whom never worked a day in their lives or paid into the system at all! So it’s especially insulting when people make comments that we’re a bunch of freeloaders. I’m not a freeloader yet, but close to it. :)

How in the world do you call this a gravy train? People like me have paid into the system for almost 35 years now, not by choice, mind you, but as a required tax. That’s no government handout, to say it is is ridiculous and insulting.

scalleywag on February 4, 2010 at 3:22 PM
It’s not insulting, it’s reality. You (as in your generation) did not pay into the system, what you’re now going to take out. Just as your parents did not pay, what they took out.

It’s called a pyramid scheme. It’s used to buy the votes of the gullible, at the expense of their grandchildren. It worked.

MNHawk on February 4, 2010 at 3:34 PM

–The Social Security law automatically reduces benefits to a level consistent with the incoming payments when the fund is empty. Right now, that would reduce all benefits by about 22% and its expected to happen in 2030 something.

And there have been several articles lately blaming old people for causing this mess when they’re the ones who paid for it all these years. How is it their fault that the government screwed it up beyond repair?

scalleywag on February 4, 2010 at 3:14 PM

It is the fault of everyone who voted for a Democrat since 1932 at least

How in the world do you call this a gravy train? People like me have paid into the system for almost 35 years now, not by choice, mind you, but as a required tax. That’s no government handout, to say it is is ridiculous and insulting.

scalleywag on February 4, 2010 at 3:22 PM

That’s right. I’ve paid into it since 1968 and then as a business owner for 15 years matched my employee’s fica payments. There’s no gravy-train-free-ride here at all.

Also, it needs to be pointed out loud and clear that just a few years ago, when Bush was trying to fix this mess, the democrats said everything was just fine and that Bush and republicans were fear mongers.

My daddy warned me 30 years ago that Social Security would not be available to me, and that I’d better have a back up plan for retirement or I’d have to work until the day I die. God bless him, he nailed it. I’d be screwed in 20 years were it not for that advice.

No we will not, because many polticians pretended that SocSec had few to any problems. Just like they ignore Freddie and Fannie. Why people trust government to solve problems like housing, retirement, health care, etc. is beyond me. Trust yourself. Trust your family. Trust your local community and organizations.

Has Anybody heard about the Far-left National Socialist Democrats wanting to seize people’s 401k’s to prop up Soc Sec?
Chainsaw56 on February 4, 2010 at 3:09 PM

–It was a request by the Treasury for suggestions on how to make distributions from 401(k) plans and employer plans more secure, such as by using annuities instead of lump sum payments. But all company pension plans already have a joint and survivor annuity as the default option, so it really doesn’t apply to most employer plans.
Jimbo3 on February 4, 2010 at 3:33 PM

IIRC, they talked about something like this during the Clinton years, It’s wouldn’t really surprise me if they were to try something like that – given the dire situation with Soc Sec and how much money people have socked away in their 401k(s).

Of course, it would mean they would have people coming at them from both sides – Soc Sec recipients who got scammed, paying into the system all these years, and people with 401ks.

The Social Security law automatically reduces benefits to a level consistent with the incoming payments when the fund is empty. Right now, that would reduce all benefits by about 22% and its expected to happen in 2030 something.

Jimbo3 on February 4, 2010 at 3:37 PM

I will be 65 in 2035, I think the stock market, or any investment I would have chosen, would give me a better ROI.

Right now, that would reduce all benefits by about 22% and its expected to happen in 2030 something.

Jimbo3 on February 4, 2010 at 3:37 PM

Welcome to my reality, scallywag. I’ve paid into the system, at a greater percentage, and for more of my income than your generation, just as has been for all generations with this program.

I guess, in 2035 or so, I’ll be on Hot Air, complaining about the “blamers” not wanting to shell out 20%+ of their income in SS taxes to pay for what I supposedly paid for.

Yes, I seen figures upwards of 20% (each, employee AND employer) to cover SS/Med, assuming nothing changes in ages or benefit levels.

I’m not trying to pick a fight (not too much anyway ;)) with retired people. Most of my wrath would be directed towards government retirees anyway. 30 years in, pretty much full salary for life. That gravy train will have to come to an end, soon.

I guess, in 2035 or so, I’ll be on Hot Air, complaining about the “blamers” not wanting to shell out 20%+ of their income in SS taxes to pay for what I supposedly paid for.

MNHawk on February 4, 2010 at 3:46 PM

I vow to always fight on the side of those that want SocSec phased out no matter how old I am. I am willing to sacrifice for this POS forced upon us all if that means my kids, grandkids, etc. will have more liberty.

I agree, but it has to be done so one generation isn’t left totally holding the bag. Each new generation feels they are the ones getting screwed. Things haven’t changed in that respect, although the whole thing is about to topple now, so this time it might not be that way much longer. Things are moving fast now, pretty much out of control.

This Ponzi scheme has got to be phased out. It creates an inter-generational conflict that is unhealthy for our country.

WashJeff on February 4, 2010 at 3:58 PM

True. And speaking of inter-gegerational conflicts:

‘But the severity of afflictions increases and the cost of preventing further deterioration increases with age: “Five years before the year of death, annual health cost is virtually the same as all annual Medicare costs per capita. By the second year before death the cost has risen by about 60 percent, and in the year of death the annual cost exceeds the average by more than four times. Indeed, expenditures on persons during their last two years of life account for 40 percent of all Medicare expenditures.”…
America’s destiny is demographic, and therefore is inexorable and predictable, which makes the nation’s fiscal mismanagement, by both parties, especially shocking.’ Georg Will

Which is still why I (and at least one other here) think raising the age (it’s already 67 for me) is the best way to go. Up it at least a month per year, starting now. Once upon a time, it could be fixed, gradually raising the retirement age (full benefits) to 72. We’re probably beyond that, now.

When it was set up, the average person was dead at 65. Now it’s close to 80. The result, an ever expanding pool of beneficiaries, with fewer and fewer workers supporting them. Not supportable.

We can only prop up this economy for so long with injections of funny money into the banking system (which is used to pump air into a still largely overvalued housing market). Eventually cash flow wins out, housing prices collapse, banks can’t keep hiding their losses, and deposits start disappearing.

Same with government. They can issue bonds at near-zero interest rates for a while, which drives purchases to the short end of the curve and increases the risk of rollover defaults. Eventually debt service overwhelms everything else and we either see default or incredible cuts in expenditures.

Oh, and here’s a nice line of logic to assuage your fears of hyperinflation:

1. Hyperinflation hurts the banks.

2. The banks own Congress, the Treasury, and the Federal Reserve.

3. Therefore, there will be no hyperinflation.

Besides, you need a concurrent inflation in wages to sustain a hyperinflationary scenario. I don’t see that happening. Bottom line is, we are in a debt-based Depression and there are only two ways out. Pay down the debt (hasn’t happened since Andrew Jackson…not bloody likely) or default. Both options are deflationary.